Question

3. Determine the market price of a $200,000, five-year, 5% (pays interest semiannually) bond issue sold to yield an effective rate of 4%.

Please show all of the factors used in the calculation – PV, I/Y, N, etc. – NOT just the answer.

If the calculation involves an annuity, please indicate if it is an ordinary annuity or an annuity due.

Answer 1

Correct Answer:

Market price of the bond: $ 208,983

Working:

Since bonds pay interest at the end of the period, they are considered as Ordinary annuity.

		Annual Rate	Applicable rate		Face Value	$           200,000
	Market Rate	4.00%	2.00%		Term (in years)	5
	Coupon Rate	5.00%	2.50%		Total no. of interest payments	10
Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                     200,000	at	2.00%	Interest rate for	10	term payments
PV of $1	0.82035
PV of	$                     200,000	=	$                  200,000	x	0.82035	=	$                 164,069.66	A
Interest payable per term	at	2.5%	on	$                           200,000
Interest payable per term	$                          5,000
PVAF of 1$	for	2.0%	Interest rate for	10	term payments
PVAF of 1$	$                     8.98259
PV of Interest payments	=	$          5,000.00	x	8.98259	=	$                    44,912.93	B
			a	Bond Value (A+B)	$                       208,983

End of answer.

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